401k Loans Pros and Cons List

A 401K is a retirement plan sponsored by employers. This plan allows employees to save for retirement by making pre-tax contributions. This is the system most used in the US to ensure that employees have a livable income during retirement.

What Are the Pros of 401K Loans?

1. High Limits of Contribution
As of now, $17,500 is allowed for people up to 49 years old, and $23,000 for those over 50.

2. Protected by the Employee Retirement Income Security Act
This law requires the disclosure of important facts about the plan, and also provides an appeal process to protect individuals from not receiving his or her benefits. The Act also allows some money to be paid if the employee loses his or her job.

3. Many Employers Offer Fund Matching Programs
With these programs, many employers will match employee contributions 100%.

4. Receive Financial Guidance
A 401K plan requires members to invest money, and as a bonus, providers will usually offer free financial advice on how to/where to invest the money.

5. Receive Loans from Your 401K
In times of financial hardship, members can receive loans from their 401K plans. This does have its disadvantages though, as there are fees that have to be paid for the loan. Still, in times of need, the loans come in handy.

What Are the Cons of 401K Loans?

Limited Investment Opportunities
Other retirement packages offer a larger variety of investments, but this money will be taxed.

2. Can Become Costly
A lot of work needs to be done with a 401K plan, and the accounts can be expensive to run, and therefore have high account fees. Another issue with the fees is that participants have little control over the quality of services they receive, but still must pay.

3. Early Withdrawal Fees
With a 401K plan, there are early withdrawal fees that can be substantial. Fees will have to be paid for any money withdrawn before the age of 59 ½. Participants can usually draw from the plan due to financial hardships, but still must pay the fees.

4. Required to Draw By a Certain Age
With a 401K is that members are required to draw by the age of 70 ½. Even if the person is still working, he or she will have to take draws, and can be taxed higher than if in full retirement.

5. Long Waiting Periods
Waiting periods are another issue some face with 401K plans. This is the time many people have to wait before they can begin their 401K. This waiting period is usually six months, but in some cases, can be as long as a year.

When choosing which retirement plan is for you, it is important to look at the benefits and the disadvantages of the plan. Make sure the plan is right for your individual needs and desires.